Coty Inc. (COTY - Free Report) released third-quarter fiscal 2019 results wherein earnings surpassed the Zacks Consensus Estimate while sales lagged the same. Further, the top line declined year over year in the reported quarter while the bottom line was flat.
Performance was impacted by supply chain issues and soft demand for its mass market cosmetic brands, such as CoverGirl and Rimmel. The company has been facing supply chain disruptions related to streamlining of its distribution centers in Europe and the United States. However, management is on track with resolving the supply chain issues, which are likely to be reflected in the ongoing quarter’s results. That said, a dismal top line indicates that the company has to go a long way before a turnaround takes place.
Quarter in Detail
Adjusted earnings of 13 cents per share, flat with the year-ago figure, surpassed the Zacks Consensus Estimate of 12 cents.
Coty generated revenues of $1,990.6 million, which came below the Zacks Consensus Estimate of $2,047 million. Moreover, the top line fell 10.4% year over year. Notably, sluggishness in the Consumer Beauty segment hurt the top line to a large extent. Nevertheless, organic (LFL basis) revenues slipped 3.7% due to a negative impact from changes in revenue recognition accounting and supply chain headwinds.
Adjusted gross margin contracted 140 basis points (bps) to 62.9% in the quarter under review. Although Luxury and Professional Beauty segments witnessed improvement in margins, the same was more than offset by a margin shrinkage in Consumer Beauty. Also, an unfavorable regional mix, change in revenue recognition accounting and soft margins at Younique brand dented margins.
Additionally, adjusted operating income was almost flat at $229.5 million on account of lower fixed costs, reduced stock compensation and lower A&CP spending. These upsides were countered by a weak top line and an unfavorable 5% impact from foreign currency headwind. Further, adjusted operating margin came in at 11.5%, expanding 120 bps from the year-ago quarter.
Luxury: Net revenues in the segment slid 3.1% to $729.2 million due to changes in revenue recognition accounting and supply chain headwinds that hit the segment’s top line by roughly 1%. LFL revenues inched up 2.8%, driven by a robust performance in Burberry, Gucci, Hugo Boss and Calvin Klein. Further, the renewal of the Marc Jacobs fragrance license boosted growth in this segment. Adjusted operating income in the category came in at $126.1 million, up 26% on the back of lower cost of sales and fixed cost reductions.
Consumer Beauty: Consumer Beauty revenues dropped 17.8% to $840.3 million while LFL sales declined 10%. Results were hurt by supply-chain disruptions and changes in revenue recognition accounting. Also, a persistent softness in mass beauty categories in the United States and Europe was a drag. Moreover, performance of Younique was disappointing during the quarter. Adjusted operating income came in at $55.8 million, down about 42.7% from the prior-year quarter’s tally.
Professional Beauty: Net revenues in the segment amounted to $421.1 million, down 6.1% year over year and 0.6% on LFL basis. The unit’s performance was hurt by disruptions at Coty’s North American warehouse and reduced trade inventory for certain customers. Adjusted operating income in the category was $47.3 million, reflecting a rise of 57%.
On a regional basis, net revenues in North America declined 14% (down 13% on LFL basis) year on year and totaled $611.7 million. The segment’s performance was affected by changes in revenue recognition accounting along with softness in Consumer Beauty and Younique. Additionally, Professional Beauty in this region reported dwindling revenues due to lower trade inventory and supply chain disruptions.
Sales in Europe decreased 14% (down 5% LFL) to reach $837.9 million as improvements in Luxury and Professional Beauty segments were countered by weakness in Consumer Beauty. Sales in the ALMEA region were nudged up 1% to $541 million. Nevertheless, sales in the region improved 11% on LFL basis, courtesy of a solid momentum in Luxury and Consumer Beauty.
Other Financial Updates
Coty ended the quarter with cash and cash equivalents of $384.1 million and net long-term debt of $7,772.3 million.
During the third quarter, the company provided $213.7 million of net cash from operating activities and free cash flow of $142.1 million.
In a separate press release, the company announced a dividend of 12.5 cents a share, payable Jun 28 to shareholders of record as of Jun 6.
Coty Inc. Price, Consensus and EPS Surprise
Management is on track with efforts to revive the company on the growth trajectory although the same is likely to take some time. In this respect, the company is poised to improve the Consumer Beauty unit, which has long been on the downside. In doing so, this Zacks Rank #3 (Hold) company is focusing on optimizing costs, simplifying its product portfolio and increasing brand investments. Further, it seeks to capitalize on the sturdy performance of the Luxury and Professional Beauty segments. It also intends to undertake initiatives to boost sales and margins in the near term. Further, management highlighted that it will soon come up with a strategic plan to restore its top line.
Additionally, the company still expects adjusted operating income (on constant currency basis) in fiscal 2019 to lie below the fiscal 2018 level. Adjusted operating income for fiscal 2019 is projected to be in the $950-$1 billion band at constant currency basis, which indicates strong bottom-line growth in the fiscal fourth quarter. The company anticipates positive free cash flow for fiscal 2019. Moving ahead, it anticipates fourth-quarter’s year-over-year top-line trend to echo the third quarter’s level.
Coty’s shares have surged 33.8% in the past three months compared with the industry’s growth of 16.7%.
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